Is Litigating Against the SEC an Option for Individuals? - Covington ...

In early December 2006, Linda Chatman Thomsen, the 

nationwide head of enforcement for the Securities and 

Exchange Commission (SEC), touted publicly the 

strength of its litigation program, noting that it had won 

every single case it had litigated in federal court in 

2006. As she put it, “we’re 10 for 10.” 1 So, is litigating 

against the SEC a real option for individuals? 

Yes. While the SEC’s statement is technically correct, 

it is also misleading. In 2006, in at least five cases the 

SEC does not include in its calculus, the SEC lost on 

summary judgment. And the SEC recently suffered 

another loss on summary judgment in February 2007. 

Such defeats are just as much a loss as a defeat at trial. 

In fact, they are worse because it means the SEC lacked 

sufficient evidence even to get the case to a jury. 

Moreover, in three of the SEC’s “victories,” the SEC 

actually lost significantly at the remedies phase of the 

trials. 

SEC’s Summary Judgment Losses 

Let’s first consider the summary judgment cases. In 

February 2006, a Federal District Court Judge in Los 

Angeles granted summary judgment for Thomas Talbot 

(Talbot), a director of Fidelity National Financial, Inc., 

rejecting insider trading charges. 2 The SEC claimed 

Talbot learned material nonpublic information in a 

Fidelity National board meeting regarding the possible 

acquisition of Lending Tree. Two days after the board 

meeting, Talbot purchased 5,000 shares of Lending 

Tree, having never previously traded in Lending Tree 

securities. The court found that the information was 

nonpublic, might be material, and Talbot used it to trade. 

But the court concluded that Talbot had no duty to 

maintain the information in confidence because Fidelity, 

on whose board he served, owed no duty of confidentiality 

to Lending Tree. The court granted summary 

judgment against the SEC. 

Second, in SEC v. Cedric Kushner Promotions, Inc., 3 

the Federal District Court in New York granted summary 

judgment for defendant Steven Angel, a former director 

of Cedric Kushner Promotions (CKP). The SEC had 

sued Angel for fraud under Section 10(b) of the 

Exchange Act in connection with CKP’s filing of its 

Form 10-KSB on May 20, 2003, which contained unauthorized 

computer signatures of the company’s auditors. 

The SEC sought monetary penalties and an order permanently 

barring Angel from serving as an officer or a 

director of any public company. 

American Bar Association • Section of Litigation • Securities Litigation Journal • Winter 2007 

Is Litigating Against the SEC an Option for Individuals? 

By Jamie A. Levitt, David B. Bayless, and Geoff Graber 

The court found, however, that Angel had played only 

a “very background role” in the preparation of the Form 

10-KSB. Accordingly, the court rejected the SEC’s contention 

that Angel could be held liable for a primary 

violation of Section 10(b) under a theory of “substantial 

participation” in the preparation of the Form 10-KSB. 

The court also rejected the SEC’s argument that Angel 

could be held liable for aiding and abetting a violation 

of Section 10(b). The court granted summary judgment 

against the SEC. 

But summary judgment was not the end of the story 

in Angel’s case. Three months after granting summary 

judgment, the court 

ordered the SEC to pay 

Angel’s attorney fees and 

costs under the Equal 

Access to Justice Act. 4 

The court found that the 

SEC had no substantial 

justification in pursuing 

its action against Angel. 

In particular, the court 

noted that it was “patently 

insufficient to state, as the 

SEC does, that Angel’s 

status as a director alone 

justifies the imposition of 

primary liability [under 

Section 10(b)]. Although 

The court said 

the SEC “is not 

unlike Britney Spears 

in its inability to 

use quotation 

marks correctly.” 

a director has certain fiduciary obligations, there is no 

evidence that Angel knew of the false statements or was 

otherwise in a position to remedy them.” The court 

awarded Angel more than $53,000 in fees and costs. 

Third, in SEC v. Todd, 5 the Federal District Court 

granted summary judgment for defendant Jeffrey 

Weitzen, the former CEO of Gateway, Inc., whom the 

SEC had sued for fraud regarding certain statements in 

the third quarter of 2000. But Weitzen had not signed 

the 10Q for the third quarter of 2000. (This was pre- 

Sarbanes-Oxley.) Instead, the SEC attempted to impute 

the statements to Weitzen through a theory of “substantial 

participation” and “intricate involvement.” But the 

only evidence the SEC offered was that Weitzen had 

signed the management representation letter to 

Gateway’s auditor. The court concluded that a reasonable 

fact finder “could not find this to be substantial in relation 

to the preparation of the entire quarterly filing” and 

so refused to impute any alleged misstatement in the fil- 

Published in Securities Litigation Journal, Volume 17, Number 2, Winter 2007. © 2007 by the American Bar Association. Reproduced with permission. 

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ing to Weitzen. 

The SEC also alleged that Weitzen made false statements 

in a press release regarding transactions whose 

sole purpose was “closing the gap” between Gateway’s 

anticipated revenue for the quarter and analysts’ consensus 

expectations. But, while Weitzen knew of the transactions, 

the SEC failed to provide evidence that Weitzen 

knew or was reckless in not knowing that the accounting 

for them was improper. Weitzen “was not an accountant” 

nor had the SEC offered evidence “that he had any 

reason to have accounting expertise sufficient to challenge 

the treatment given to any particular transaction.” 

Thus, the court granted summary judgment on this 

claim too. 

The SEC also sued Weitzen for control person liability, 

which requires an underlying violation that Weitzen 

controlled. The SEC based its underlying violation upon 

the cease-and-desist order that Gateway accepted in an 

SEC settlement. But the court stated that “the order is 

the result of a negotiated settlement between the SEC 

and Gateway,” Gateway “neither admitted nor denied 

any of the allegations,” and “the SEC cites no authority 

for the proposition that a negotiated settlement, which 

on its face does not constitute an admission, establishes 

a primary violation for purposes of Section 20(a) liability.” 

As to the control person allegation, the court held 

that being CEO was not conclusive, and the SEC presented 

no evidence that Weitzen had actual control over 

the disputed transactions. In contrast, Weitzen presented 

evidence of his good faith. During his tenure, Gateway 

established an office of ethics and compliance and an 

internal audit function, and strengthened internal 

accounting controls. Also, when questions on transactions 

arose, he ensured that people with the requisite 

expertise were comfortable with the accounting. The 

court granted summary judgment in favor of Weitzen on 

all counts. 

Fourth, in SEC v. Heartland Advisors, Inc., 6 the 

Federal District Court in Wisconsin granted summary 

judgment for two individuals accused of insider trading—the 

president of an investment advisor and his 

client. The SEC alleged that the adviser had received 

negative information about a company, had lunch with 

his client, who took a “tour” of the investment advisor’s 

offices after lunch, and then the client promptly sold a 

significant amount of shares in the company about 

which the adviser had received negative information. 

The SEC alleged that the advisor had tipped his client 

during the “tour.” 

The SEC argued that the timing and amount of the 

client’s trades were sufficient to defeat the summary 

judgment motion. But the court ruled that the defendant 

demonstrated a pattern of liquidating his investment in 

this security, which nullified the SEC’s inference based 

on the timing and the amount of the trade. The court 

also criticized the SEC’s statement in its brief that the 

defendant had taken a “tour” of the firm’s offices, thus 

implying that the client had been in the office to discuss 

what the adviser had just learned. The court found that 

there was no evidence of such a “tour,” making the 

SEC’s use of that word in quotations misleading. The 

court said the SEC “is not unlike Britney Spears in its 

inability to use quotation marks correctly.” 

Fifth, in SEC v. Miller, 7 the SEC sued John Miller, 

the former CEO, president and chairman of Master 

Graphics, Inc. The SEC alleged that Miller instituted a 

plan known as the “Salary and Rent Incentive Plan,” 

which was devised artificially to inflate Master 

Graphics’ earnings and, in turn, its stock price. The SEC 

alleged that Miller needed to inflate Master Graphics’ 

stock price to avoid margin calls on his brokerage 

account, which consisted almost entirely of Master 

Graphics stock. The SEC sought over $4.25 million in 

disgorgement, as well as civil penalties and a permanent 

injunction against violating the securities laws. 

Miller filed a motion for partial summary judgment 

on the SEC’s request for disgorgement of $4.25 million. 

The Federal District Court in Atlanta granted Miller’s 

motion for partial summary judgment, finding that the 

SEC was entitled—at most—to approximately $10,184 

in disgorgement. The court also noted that this amount 

was “de minimus, in the scheme of things, and arguably 

not worth the litigation expense and court resources.” 

Sixth, and most recently, in SEC v. Jones, 8 the Federal 

District Court in New York granted summary judgment 

in favor of the defendants, two senior Citigroup executives, 

whom the SEC alleged had aided and abetted violations 

of Section 206 of the Advisers Act in connection 

with mutual fund fees. The SEC sought civil penalties, a 

permanent injunction barring the defendants from future 

violations of the Advisers Act and disgorgement of profits. 

The court held that the SEC had failed to establish 

that the five-year statute of limitations set forth in 28 

U.S.C. § 2462 should be tolled as a result of the defendants’ 

alleged concealment of their actions and that the 

statute of limitations applied to all of the SEC’s claims 

including the claim for a permanent injunction. 

With respect to the injunctive relief, the court noted 

that the SEC must establish more than defendants’ past 

violations. The court found that the SEC had produced no 

proof of a realistic likelihood of recurrence, noting that 

several years had passed without incident since the defendants’ 

alleged violations. Accordingly, the court held that 

the requested injunction was aimed at punishing the 




defendants, not at protecting the public from future harm, 

and as such should be treated as a civil penalty subject to 

the five-year statute of limitations. Regarding the claims 

for civil penalties, the court found that the SEC had not 

met its burden regarding fraudulent concealment, noting 

that the SEC had been informed within the statute of limitations 

period of facts that indicated that Citigroup may 

have been involved in self-dealing, even if the full extent 

of the self-dealing was not made known to the SEC at 

that time. Accordingly, the court dismissed the SEC’s 

claim for civil penalties as time-barred. 

With respect to disgorgement, although it was 

Citigroup, and not the defendants, who profited directly 

from its appointment as transfer agent, the SEC argued 

that the defendants profited because their compensation 

was based on how they performed on significant projects, 

including the mutual fund transfer agent arrangement. 

The court noted that to award disgorgement, the 

SEC must provide a “reasonable approximation of profits 

causally connected to the violation.” The court held 

that the SEC had failed to provide the court with guideposts 

for determining what portion of defendants’ compensation 

should be disgorged, and dismissed the SEC’s 

disgorgement claim. Thus, the court granted the defendants’ 

motion for summary judgment in its entirety and 

dismissed the SEC’s entire case. 

These six cases surely indicate that litigating against 

the SEC remains a real option to consider as you analyze 

the strategy for your cases involving individuals. 

Taking a Closer Look at the SEC’s Trials in 2006 

Moreover, three of the SEC’s “10 for 10” show that the 

remedies a court imposes may be significantly less than 

what the SEC seeks. In SEC v. Kotrozo, 9 the jury 

returned a verdict in favor of the SEC, finding that 

Raymond Kotrozo violated a previous Commission 

order that barred his association with a broker-dealer 

and that two other defendants had aided and abetted his 

violation. The SEC sought a permanent antifraud injunction, 

disgorgement, and a civil monetary penalty. On 

January 31, 2006, the court concluded that no injunction 

should issue as the SEC had failed to prove a reasonable 

likelihood of future violations. As to disgorgement, 

the court found that the only unjust enrichment 

was $73,000 (less than the SEC’s request of $454,293 

plus interest). And while the court did impose a civil 

penalty, the amount was only $5,000—far less than the 

$454,293 sought by the SEC. 

Second, in SEC v. Snyder, 10 the SEC alleged that 

Bruce Snyder, a former vice president and chief 

accounting officer of Waste Management, Inc., had filed 

false quarterly filings on Form 10Qs, aided and abetted 


the company’s filing of false 10Qs, and committed 

insider trading. A jury returned a verdict in favor of the 

SEC on all charges, after which the SEC sought a permanent 

antifraud injunction, an order prohibiting Snyder 

from ever serving as an officer and a director of a public 

company, an order requiring him to disgorge his ill-gotten 

gains on the trades, and an order requiring him to 

pay civil monetary penalties equal to three times the 

amount of the disgorgement. 

On August 22, 2006, the Federal District Court in 

Texas issued a lengthy opinion analyzing each of the 

remedies sought by the SEC. The court began by denying 

the request for permanent injunctive relief, concluding 

the defendant’s actions “were not so egregious as to 

support an award of permanent injunctive relief.” Snyder 

was a first-time defendant and, while not precluding the 

issuance of an injunction, 

the court found that the 

isolated nature of his 

actions weighed against 

such a remedy. 

Furthermore, the court 

found the sincerity of 

Snyder’s assurances 

against future violations 

counseled strongly 

against the issuance of an 

injunction. Likewise, with 

respect to the officer and 

director bar, the court 

concluded that, on balance, 

the lack of egregiousness, 

the isolated 

nature of the conduct, and 

the strong likelihood that 

Snyder would not commit 

future violations rendered 

an officer and a director bar unwarranted. 

In SEC v. Seghers, 

the SEC alleged that 

defendant Conrad 

Seghers fraudulently 

caused various 

hedge funds to 

overstate the value 

of investments. 

The court did grant disgorgement with respect to the 

trades in the amount of $115,473.49. But, significantly, 

the court declined to impose any civil penalty. Thus, the 

only remedy imposed against Snyder, even though the 

SEC “won” and a jury had found him guilty of fraud 

and insider trading, was that he had to return the ill-gotten 

gains from his trades. No injunction, no officer and 

director bar, and no monetary penalty was imposed. 

Finally, in SEC v. Seghers, 11 the SEC alleged that 

defendant Conrad Seghers fraudulently caused various 

hedge funds to overstate the value of investments. The 

jury returned a verdict in favor of the SEC on its fraud 

charges against Seghers; violation of Section 17(a) of 

the Securities Act, Section 10(b) of the Exchange Act 





and Rule 10b-5 promulgated thereunder; and Section 

206 of the Investment Advisors Act. The SEC requested 

approximately $1,060,000 in disgorgement, a $120,000 

monetary penalty, and a permanent injunction against 

violation of the securities laws. 

The court granted the SEC’s request for a permanent 

injunction. But it imposed a monetary penalty of only 

$50,000. And the court refused to order any disgorgement, 

finding that Seghers had not received any ill-gotten 

gain. Thus, at the end of the day, the total monetary 

relief obtained by the SEC was $50,000—far less than 

the $1,180,000 it had sought. 

So, who “won” these three cases? There were jury 

findings against the three individuals. But the actual 

remedies imposed were dramatically less than what the 

SEC had sought. 

All of these cases demonstrate that litigating against 

the SEC is a real option that individuals must consider. 

Not only does the SEC lose cases on the merits but, 

importantly, federal courts closely scrutinize the SEC’s 

requests for remedies and do not hesitate to limit or 

deny the SEC’s unwarranted or excessive requests. 

Of course, the possibility of a negative jury verdict, 

coupled with the publicity, the monetary costs, and the 

emotional and psychological costs, of going to trial, cannot 

be ignored. But an individual who has insurance 

and/or indemnification rights or other monetary means, 

along with the mettle to fight, must consider this option. 

Consideration of litigating against the SEC is particularly 

important these days as individuals are becoming 

enforcement targets in stock-option investigations. 

Indeed, readers of this article may well face (or know 

colleagues who face) the issue of whether to litigate 

against the SEC. These cases should serve as a reminder 

that individuals have an option when the SEC comes 

calling.✺ 

Jamie A. Levitt is a partner and Geoff Graber is an 

associate at Morrison & Foerster LLP. David B. Bayless 

is a partner at Covington & Burling LLP. 

1. ABA Business Law Section Meeting, held Dec. 1, 2006 in 

Washington, D.C. 

2. SEC v. Talbot, 430 F. Supp. 2d 1029 (C.D. Cal. 2006). 

3. 417 F. Supp. 2d 326 (S.D.N.Y. Feb. 17, 2006). 

4. SEC v. Cedric Kushner Promotions, Inc., 2006 U.S. Dist. LEXIS 

32846 (S.D.N.Y. May 23, 2006). 

5. 2006 U.S. Dist. LEXIS 41182 (S.D. Cal. May 30, 2006). 

6. 2006 WL 2547090 (E.D. Wis. 2006). 

7. 2006 U.S. Dist. LEXIS 56413 (N.D. Ga. July 31, 2006). 

8. No. 05 Civ. 7044 (RCC) (S.D.N.Y. Feb. 26, 2007). 

9. CV 03-5781 FMC (C.D. Cal.). 

10. 2006 U.S. Dist. LEXIS 81830 (S.D. Tex. 2006). 

11. 2006 U.S. Dist. LEXIS 69293 (N.D. Tex. Sept. 14, 2006).

Is Litigating Against the SEC an Option for Individuals? - Covington ...

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